To-date, the coronavirus pandemic has had only a moderate effect on international supply chains for offshore wind. Although delays in supply chains have been observed, it is too early to judge the long-term impact of Covid-19 on production and revenues in the sector, but with final investment decisions for a number of huge projects expected, a lengthy pandemic could have unwanted consequences
However, as lawyers at Watson Farley & Williams (WFW) told OWJ in an exclusive interview, the good news is that European Governments’ environmental commitments and reduced reliance on government subsidies suggest the sector is underpinned by fundamentally positive long-term prospects.
Speaking to OWJ in late March 2020, WFW partner Dr Malte Jordan, the law firms’ energy sector co-head based in Hamburg, told OWJ he was ‘moderately optimistic’ about new offshore wind projects and their ability to ride-out any adverse effects of the coronavirus pandemic.
He said that compared to the effects on other industries – such as transportation – where the effects have been much more profound, offshore wind projects are not yet seriously affected.
“We are optimistic about the power sector as a whole,” he said. “It is a stable market, in which the major trends that were clear before Covid-19 remain unaltered.” He noted that the industry had benefited from the low interest rate environment in the run-up to the pandemic, and that interest rates are likely to remain low for some time as a result of the crisis.
“Governments have already responded with stimulus packages and fiscal measures and might do more. That will almost certainly help too,” Dr Jordan said, although it is not clear yet whether their response to low oil prices might in any way affect commitments to the energy transition.
In recent analyses, Dr Jordan and colleagues at WFW have contrasted the seeming stable environment in the power sector with problems in other infrastructure sectors where severe immediate impacts on cash flows for projects have become evident.
In the power sector, they say, markets do not at present appear to be forecasting severe declines in power demand. Modelling suggests that measures aimed at slowing the spread of coronavirus may lead to an aggregate decline in power demand in Europe of 6% in 2020, with an associated average decline in power prices of 9% for the year, but the expectation is that most of that demand will be restored once coronavirus-related restrictions are limited.
Dr Jordan and WFW London-based partner Emmanuel Ninos also highlighted other factors that auger well for the offshore wind sector and its ability to ride out the potential ill-effects of the pandemic.
These include the financial strength of sponsors for projects and of the leading contractors in supply chains for offshore wind. Mr Ninos said that compared to some other renewables, such as small-scale solar, offshore wind is well-placed thanks to the larger balance sheets of those involved in developing and financing projects. “Long-term liquidity is not expected to be an issue,” he said.
Although the situation is evolving all the time, WFW says there are reasons to believe that the long-term drivers of the availability of liquidity to the renewables industry should not be adversely affected by the pandemic. And although institutional investors will want to carefully analyse the potential impact of coronavirus on pending investments, in principle the pandemic should not change their underlying drive and appetite to invest in long-term cash-yielding assets.
Dr Jordan and Mr Ninos agreed that the development timeline for offshore wind is also in its favour. Mr Ninos cited the example of a large UK project currently in the pre-development phase for which construction is not due to get underway for several years. “For that particular project and others like it, it’s very much business as usual at the moment,” he said.
Mr Ninos said, “Our experience to-date of projects in pre-development is that everyone is being very reasonable about Covid-19 at the moment. And when it comes to projects that are already producing power, in the UK at least, they are usually the subject of a contract for difference (CfD) or another form of subsidy so potential revenue from them is a known quantity.”
The same seems to be true of yet-to-be-built projects that secured deals in the most recent auctions in the UK, such as SSE’s Seagreen project, which it wholly owns, which was awarded a 15-year CfD for 42% of its capacity.
Plans are in place for a sell-down of an equity stake in the project, with oil majors such as Total and Shell said to be interested in participating, although, in the light of the pandemic, SSE has announced a review of operational and capital expenditure for projects that have yet to reach financial close.
Apart from Seagreen, FIDs have also yet to be taken for the trio of Dogger Bank offshore windfarms SSE is developing with Equinor. The sums involved in financing the projects are considerable: taken together, the Dogger Bank projects require capital investment of around £9Bn (US$11Bn) between 2020 and 2026. At the time of writing, an FID for the Dogger Bank projects was expected by late 2020 and first power in 2023.
Mr Ninos told OWJ another factor that will help support the offshore wind industry is that to date the appetite for debt for offshore wind projects has been ‘enormous.’ Subject to the duration of the pandemic, he does not expect debt providers or export credit agencies to reassess their attitude to projects in any way.
As has been widely reported, a few issues have begun to arise in offshore wind supply chains in country’s particularly hard hit by the crisis, such as Spain, where some interruption to manufacturing has been experienced. These have centred around workers falling ill or in some cases being unable to get to work, but the vast majority of manufacturing capacity for turbines and blades has not been affected so far.
Depending on the length of the crisis and of ‘shutdowns’ in European economies, WFW believes supply chain issues might cause difficulties, as might restrictions on the movement and meeting of individuals, but that it is not clear how significant they might be.
It is also possible that reduced ‘in office’ staffing at some government agencies could lead to delays to the issuance of paperwork, and planning processes are, in some cases, being delayed in the interests of avoiding physical meetings.
In a few jurisdictions, administrative deadlines have been suspended to allow relevant parties to proceed at a pace appropriate to the developing situation, which may further affect construction timelines. Looking ahead to future projects, delays or readjustments seem likely – a case in point is the UK Round 4, for which The Crown Estate recently announced adjusted deadlines. If the pandemic is prolonged, projected construction timelines could, in some cases, face reassessment given, most obviously, personnel and supply-chain issues for project contractors.
As the pandemic evolves, said WFW’s experts, more cases of force majeure should be expected, and a number of European renewables projects under construction are considering the validity of claims made to date for force majeure relief, such as under their EPC contracts.
In the event of a lengthy pandemic, the potential is also there for projects themselves to claim force majeure under contracts.